Unchartered Waters

Vishal Rai and Sachin Sapra, partners in company secretary firm RSJ Associates, were among the first few to register themselves as insolvency professionals (IPs). As compliance experts, their foray into the space of IPs is a calculated "risk". They will have to come out of their comfort zone and dive into a profession that may require them to acquire new sets of skills and unlearn many things. IPs, after all, will be governed by a new set of laws which are a sharp departure from the existing provisions on bankruptcy and debt recovery. Besides, both Sachin and Vishal have never worked on anything close to resolving issues of stressed assets or debt recovery.

They are aware of these "shortcomings" and are, therefore, treading with caution. Vishal says they have already been approached by a corporate debtor to initiate the bankruptcy process, but they are noncommittal as they found many problems with that case. His partner Sachin says they would need to build a team - since they are compliance experts, they would need a team of professionals with expertise in finance and law - before they start accepting cases.

"Taking the assignment is easy, but we have to be very careful with implementation. The responsibility of the IPs would be enormous. Once the application has been filed, and the board has been suspended, the IP has to take over the company and run it like a going concern and at the same time prepare a resolution plan, all within a tight schedule. This can only be done with a team of experts," says Sachin.

The new beast in town

The new Insolvency and Bankruptcy Code, 2016 has thrown open opportunities for a new set of professionals, whose primary role would be to take over the management of a corporate debtor against which a bankruptcy application has been moved, run it like a going concern and prepare a resolution plan within the stipulated 180 days. A resolution plan is necessarily a revival plan for the borrower so that it can service its liabilities in future. Other roles assigned to insolvency professionals (interim IPs) include acceptance of creditors claims, verification of those claims and ascertaining the assets and liabilities of the defaulting borrower. The tenure of the interim IP is for 30 days.

These are early days for IPs and nobody knows what fate they could meet in the future. Will they be as effective as touted, or poor implementation would result in this law facing the same fate as the previous ones? The bankruptcy law was enacted in May last year and the early set of rules for corporate insolvency began to get notified only after October. The applications for insolvency cases started to be filed from December 1, 2016. So far, around 20 applications have been admitted by the National Company Law Tribunal (NCLT), the adjudicating authority for corporate insolvency cases. The law for personal bankruptcy cases is yet to be framed.

Despite the uncertainties, over 1,000 individuals (84 IPs with regular registration and 977 with a limited-period registration that lasts for six months) across different professions - chartered accountants, cost accountants, company secretaries and lawyers - have registered themselves as insolvency professionals.

For limited-period registration, chartered accountants, company secretaries, cost accountants and advocates with 15 years of practice were eligible. For regular registration, chartered accountants, company secretaries, cost accountants and advocates with 10 years of experience and graduates with 15 years of managerial experience are eligible.

Vishal Rai Partner, RSJ Associates (Photo: Vivan Mehra)

While the insolvency regulator - the Insolvency and Bankruptcy Board of India (IBBI) - has stopped registration of IPs on an ad hoc basis, those seeking regular registration have to appear in a test conducted by the board across the country. The board is also planning a national-level examination for those who solely want to pursue the career as an IP. "We are also working on the National Insolvency Examination for those who wish to pursue a career in insolvency. We, however, don't have full clarity about the structure of the course and the examination and how this will be delivered," says M.S. Sahoo, Chairman, IBBI.

Opportunities

Going by the early numbers of individuals who have registered themselves as IPs, it looks like they see immense opportunity in the new profession. That's why despite many foreseeable challenges, people are registering themselves as IPs. Some numbers would help understand the kind of opportunities IPs see in the future. As per the Economic Survey 2016/17, the Indian financial sector has stressed assets worth `12 lakh crore, which is 17 per cent of the total loan outstanding, and 8.4 per cent of the GDP. Many of these cases would land up under the new bankruptcy regime.

There are about 700 BIFR and 15,000 DRT cases (related to corporates only), in addition to 5,200 winding up and amalgamation cases pending before high courts, that are being transferred to NCLT. According to a report by ASSOCHAM and Crisil, the new bankruptcy law can potentially release about Rs 25,000 crore capital currently locked up in non-performing assets (NPAs) over the next 4-5 years. "There is ample scope for IPs considering the data on pending cases and the number of professionals available as on date," says Shyam Agrawal, President, Institute of Company Secretaries of India (ICSI), which has registered itself as an IP agency - it grants registration to IPs, lays down standards for them and monitors their performance.

Sandeep K. Gupta, a chartered accountant by qualification and an IP, elaborates further. "The NPA size is Rs 8-9 lakh crore, which is huge in itself. And the insolvency law doesn't talk only about established defaulters like in the case of NPAs, it talks about any defaulter. Besides, the law also talks about default by partnership firms and individual defaults. Therefore, the opportunity for insolvency professionals is enormous," says Gupta, who has over 20 years of experience in dealing with stressed companies and stressed assets.

The challenges

While there are opportunities galore for resolution professionals, they are not without significant challenges. As the main pillar of the new law is time-bound resolution of bankruptcy cases, these professionals have to accomplish a very big feat within a strict timeline of 180 days. Sahoo of IBBI explains: "The challenge for the IP is to manage the company as a going-concern without diminishing its value, and come up with a resolution plan within 180 days." He says that though the IPs have done restructuring, takeover, mergers and amalgamations, they have not done resolution under the new Code, which is unique in many ways.

Why is it unique? For the first time, any insolvency law in the country gives the handle (of the resolution plan) to the creditors, especially the financial creditors. The IP would run the management of the defaulting debtor with the "guidance" of the creditors committee. Besides, the resolution plan has to be approved by 75 per cent of the financial creditors by size of their loans. The creditors, therefore, would always be monitoring the IPs.

Also, taking over a company and running it like a going concern is easier said than done. Imagine an IP with no prior experience of working with a steel company may be roped in for a project involving a debtor which is a steel manufacturer. How is he supposed to run a company without understanding the business of the company? He doesn't have the luxury of time as well because he has to also simultaneously work on a resolution plan, conduct meetings of the creditors committee as well as raise interim finance for the company.

Devendra Singh Insolvency professional (Photo: Shekhar Ghosh)

However, according to Sahoo, IPs have been adequately empowered by the bankruptcy law. First, the committee of creditors, who are generally sophisticated fund managers or bankers, is behind them for taking decisions on major issues. Second, IPs are empowered to engage any professional they think necessary in addition to the existing managerial personnel who are at their disposal.

But there are other practical issues. There is every chance that the management and staff of the borrower against which the insolvency proceeding has been started does not cooperate with the IP and don't provide information and documents necessary for running the company or preparing a resolution plan. Vishal Rai of RSJ Associates says, "We may face situations where the promoter of the debtor would try to stop us from entering the premise, forget about giving us access to all documents and books of accounts."

His partner Sachin Sapra says that though the Code stipulates that if the debtor is not giving access of the premise to IPs, they can go to court and seek help from local authorities. But it's a time-consuming process and the resolution process is time-bound. Even if the IPs are allowed to enter the premise of the debtor, they would need the staff to help them in running the company as a going concern. Not everyone in the staff may cooperate.

A company may have thousands of financial transactions. The challenge for an IP would be to identify the important transactions (which helps a company run as a going concern) and stop those inimical to the interests of the company. Devendra Singh, a chartered accountant and one of the first few to receive regular registration as an IP, however, says that the law requires the debtor to provide all the necessary information required by the IP in running the company. He says there are penal provisions (a maximum jail term of five years and a penalty of up to `1 crore) for action against the promoter or staff of the defaulting debtor if the IPs are not given access to necessary information. A tight deadline of 180 days (extendable up to 270 days) remains the biggest challenge for IPs. Manoj Kumar, Partner & Head, M&A and Transactions, Corporate Professionals, an advisory firm which offers corporate, legal and tax solutions, points out the kind of work an interim IP has to perform within a short span of 30 days.

"He needs to make the public announcement for inviting claims, collate all the information, appoint valuers, receive and collate claims, determine the financial position of the debtor, prepare the information memorandum with desired details and call the first meeting of the committee of the creditors; all in a time- bound manner. There is an enormous task to perform if the company is big," says Manoj Kumar. Imagine a company which has immovable properties in four different locations in the country, points out Sachin Sapra of RSJ Associates. It would be difficult for the resolution professional to take charge of these assets and value them within 30 days, asserts Sapra.

Team work

Given the enormity of the task and tight schedules, IPs are looking to build their own team before setting out to handle cases. Some of them are even looking to reorganise themselves as insolvency professional entities - the institutional version of IPs - as they feel this is not a single person's job. "We need all kinds of experts - financial, legal and compliance-related - under us to be able to run a company, ascertain the value of assets and liabilities of a company and prepare a resolution plan acceptable to 75 per cent of the financial creditors, all within the stipulated timeline," says Devendra Singh,

These are early days and IPs, despite being aware of the opportunities the bankruptcy law has thrown open for them, are treading cautiously knowing pretty well the enormity of the task and the challenges ahead.